Friday, June 10, 2011

Has Capitalism Changed Structurally?

In 'a recent lecture “On Growth-Mediated Development” by Amartya Sen, a winner of the economics prize established in memory of Alfred Nobel ….

One of Professor Sen’s main queries is whether European leadership should come from “democratically elected leaders or financial institutions and rating agencies that seem to be in a position to lord over European political terrain quite freely right now”. He goes on to argue that European policies to address large public sector deficits accept the lowering of growth rates “as a kind of inevitable natural process rather than being substantially if not exclusively the result of their own over-restrictive policies”.

I would be more cautious than Prof Sen in treating democracy as a summum bonum, partly because democracy is so often interpreted to mean mere majority voting and also because of the number of crimes that have been committed in its name. I would prefer some more anodyne expression such as constitutionally appointed government. And I would add that lasting growth, as Adam Smith observed, comes from the efforts of innumerable individuals to better their lot – or from the mere urge to activity. What Prof Sen has in mind is the short- to medium-term downward pressure on output and employment of restrictive fiscal and monetary policies, which could have longer-term effects. But there is no reason to dispute his basic argument.'

CommentI find these arguments from Amartya Sen and Samuel Brittan worthy of further reflection, if not immediate acceptance. There clearly has been some sort of a disconnect between elected government and unelected major influencers and players in financial markets that have such profound affects on underlying economic success and failures.

It is always good to be reminded of what Smith said, namely ‘that lasting growth, as Adam Smith observed, comes from the efforts of innumerable individuals to better their lot – or from the mere urge to activity.’

What is true of large and small capitalists in ‘real’ markets is true of their descendants in finance markets. The 'smart' guys in the City aim to ‘better their lot’ and because of the instantaneous nature of doing so in finance, this means the race is on every minute of a working day. Easy large but risky gains fuels the City’s ‘urge to activity’ – their rivals and competitors are often only a desk or two or the Internet away.

This line of business is centuries away from the patient compound entrepreneurial interest as experienced by monopoly and protection seeking ‘masters and manufacturers’ in Smith’s days, aided by occasional windfall gains from greedy ministers and, occasionally 17th-18th Century, the monarch’s, corruption in the mercantile economy. Today, it becomes intoxicating (or cocaine-driven) and they tumble to their nemesis in the inevitable crash when the ‘emperor’ displays his – and their – nakedness and expose our vulnerability to their ‘animal spirits’ (as Keynes called their predecessors behaviours in the 1930s).

One paragraph I did note in Samuel Brittan’s article is worth a mention:

‘One can go back further. Rudolf Hilferding, the early 20th century German-speaking neo-Marxist, annoyed many of his soulmates by denying that capitalism was bound to collapse. But – in his 1910 book, Finanzkapital – he was one of the first to observe the changing nature of the system. He asserted that financial forces were leading to the cartelisation of industry. He did not live to see them threatening to bring down governments.’

These major social changes were observe and dramatised, at a less elegant theoretical level, in the 19th–century by, among other examples, in Anthony Trollope’s ‘The Way We Live Now’ (1875), and the earlier 1846 novel, The Newcomes by Thackeray. If they could see that something was afoot, who didn't the economists?